<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 333-08305
UTG COMMUNICATIONS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3895294
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17 Cattano Avenue, Morristown, New Jersey 07960
Address of principal executive offices) (Zip Code)
(973) 644-3161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or -for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 13, 1998, there were 1,453,190 shares of Common Stock, par value
$.00001 per share, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
INDEX
Part I
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security-Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30. March 31.
ASSETS 1998 1998
-------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents (Note 1c) 123,145 $ 363,169
Subscription Receivable 0 0
Accounts Receivable, Net of allowance for
doubtful
Accounts at June 30, 1998 and March 31, 1998 of
$263,617 and $263,617 respectively 466,710 354,233
Other Receivables (Note 3) 869,928 902,563
Prepaid Expenses and Other Current Assets 205,756 74,318
-------------- ---------------
Total Current Assets 1,665,540 1,694,283
Property and Equipment, at cost, Net of
Accumulated
Depreciation at June 30, 1998 and March 31,
1998 of
$1,284,120 and $1,184,547 respectively (Note 1g 2,410,585 2,311,164
& 2)
Organization Costs, at cost, Net of Accumulated
Amortization at June 30, 1998 and March 31,
1998 of
$0 and $3,303 respectively (Note 1d) 3,451 10,162
Goodwill, at cost, Net of Accumulated
Amortization
of $19,304 and $6,561 (Note 1e) 242,120 245,118
Customer Lists, at cost, Net of Accumulated
Amortization
of $156,179 and $ 104,119 780,781 832,950
Deferred Taxes (Note 1L & 5) 0
Other Assets 71,813 78,665
-------------- ---------------
TOTAL ASSETS 5,174,290 5,172,342
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank Overdraft (Note 1h) 0 0
Accounts Payable and Accrued Expenses 1,555,042 1,369,818
due to Related Party 5,586 0
Capital Lease Obligation, Current (Note 6) 105,924 101,021
-------------- ---------------
Total Current Liabilities 1,666,552 1,470,839
Capital Lease Obligation, Long-Term (Note 6) 493,150 469,958
Commitments and Contingencies (Note 6) 0 0
-------------- ---------------
TOTAL LIABILITIES 2,159,702 1,940,797
-------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 1 &
7)
Common Stock - $0.00001 Par Value Authorized
20,000,000 shares; 1,383,190 and 1,303,190
Issued and Outstanding at June 30, 1998 and
March 31, 1998 respectively 14 13
Additional Paid-in Capital 8,085,628 7,925,628
Accumulated Deficit (4,892,549) (4,551,224)
Cumulative Foreign Currency Translation (178,504) (142,872)
Adjustment
Minority Interest (Note 3) 0 0
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
-------------- ---------------
Total Stockholders' Equity (Deficit) 3'014'589 3'231'545
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) 5'174'290 5'172'342
======================================
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter ended
June 30, June 30,
--------------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
NET SALES 580,869 1,317,401
COST OF SALES 303,257 981,514
-------------- ---------------
GROSS PROFIT 277,612 335,887
-------------- ---------------
SELLING AND TECHNICAL EXPENSES
Consulting Fees 75,561 21,339
Technical Fees 45,252 519,892
Sales Salaries 183,461 79,554
Other Selling Expenses 27,186 28,031
-------------- ---------------
Total Selling and Technical Expenses 331,460 648,816
-------------- ---------------
LOSS FROM OPERATIONS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES (53,848) (312,929)
-------------- ---------------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees 6,644 180,340
Salaries 0 202,371
Depreciation and Amortization 164,376 171,576
Professional Fees 47,775 76,837
Travel Expenses 1,386 25,933
Employment Agency Fees 0 13,487
Rent Expenses 18,760 49,375
Insurance Expenses 0 8,754
Other Operating Expenses 46,755 165,627
-------------- ---------------
Total General and Administrative Expenses 285,697 894,300
-------------- ---------------
LOSS FROM OPERATIONS (339,545) (1,207,229)
-------------- ---------------
OTHER INCOME (EXPENSES)
Interest Income 36 43
Interest Expense (154) (13,502)
Loss from Foreign Currency (Note 1i) 0 (20,540)
Other Income (21) 41,762
-------------- ---------------
Total Other Income (Expenses) (139) 7,763
-------------- ---------------
NET LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST (339,684) (1,199,466)
INCOME TAXES (Note 1l and 5) 0 0
--------------------------------------
NET LOSS BEFORE MINORITY INTEREST (339,684) (1,199,466)
Closing Subsidiary Costs (1,641)
MINORITY INTEREST 0 858
-------------- ---------------
NET LOSS (341,325) (1,198,608)
============== ===============
LOSS PER COMMON SHARE (Note 1k) (0.25) (0.92)
======================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Common Additional Foreign Total
Stock Paid-In Accumulated Currency Minority Stockholders'
----------------------------
Shares Amount Capital Deficit Adjustment Interest Equity
(Deficit)
---------------------------- ---------------- ---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 1,303,154 $13 $7,925,629 $(4,551,224) $(142,872) $0 $3,231,546
31, 1998
Net Loss - For
the Three months
Ended June 30, 0 0 0 (341,325) 0 (341,325)
1998
Issuance of 80,000 1 159,999 0 0 160,000
Common Stock
Minority Interest 0 0 0 0 0 0 0
Cumulative
Foreign Currency
Translation 0 0 0 0 (35,632) 0 (35,632)
Adjustment
-------------- ------------- ---------------- ---------------- ---------------- -------------- -----------------
Balance at June 1,383,154 14 8,085,628 (4,892,549) (178,504) 0 3,014,589
30, 1998
============== ============= ================ ================ ================ ============== =================
</TABLE>
The accompanying notes are an
integral part of the consolidated
financial statements.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter ended
June 30, June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (341,325) (1,198,608)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities
Depreciation and Amortization 164,376 171,576
Changes in Certain Assets and Liabilities:
Increase in Restricted Cash 0 0
Increase in Accounts Receivable (112,477) (252,053)
Increase in Other Receivables 32,635 (150,970)
Increase in Prepaid Expenses (131,438)
Increase in Organization Costs 6,711 (194)
Increase / Decrease in Other Assets 6,852 109
Increase in Due From Affiliate
Due To/From Related Party 5,586 44,679
Increase (Decrease) in Bank Overdraft 0 111,573
Inc./(Dec.) Accounts Payable and
Accrued Expenses 185,224 1,031,939
---------------------------------
Total Cash Used by Operating Activities (183,856) (241,949)
---------------------------------
CASH FLOWS FROM INVESTING / (DIVESTING)
ACTIVITIES:
Purchase of Fixed Assets, Net (198,886) (230,974)
Sale of Subsidiaries
Increase / Decrease in Goodwill (9,745) (289,465)
Increase / Decrease in Customer List 0
---------------------------------
Total
Total Cash Used by Investing / (Divesting) (208,631) (520,439)
Activities
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Notes Payable
Increase in Capital Lease Payable 28,095 (3,048)
Contribution to Capital 160,000 670,000
Preceeds from Loan 0 0
Offering Costs 0 0
Minority Interest 0 (858)
---------------------------------
Total Cash Provided By Financing Activities 188,095 666,094
---------------------------------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH (35,632) (45,139)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS (240,024) (141,433)
CASH AND CASH EQUIVALENTS - BEGINNING 363,169 388,198
---------------------------------
CASH AND CASH EQUIVALENTS - ENDING 123,145 246,765
============= =============
CASH PAID DURING THE PERIOD FOR:
Interest Expense (154) (13,502)
============= =============
Income Taxes 0 0
============= =============
</TABLE>
<PAGE>
- ---
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation have been included.
For further information refer to the consolidated financial statements
and footnotes included in Form 10-KSB for the year ended March 31, 1998.
The accompanying consolidated financial statements include the accounts
of UTG Communications International, Inc. ("The Company"), a holding
company organized under the laws of the state of Delaware on April 17, 1996
and its majority-owned and/or controlled subsidiaries:
1) Starfon Telecom Services AG, ("Starfon "), formerly UTG Communications
Holding AG, incorporated under the laws of Switzerland on February 29, 1996
(owned 100% by the Company);
2) UTG Communications Belgium N.V., ("UTG Belgium"),incorporated under
the laws of Belgium on June 27, 1996 (owned 100% by UTG Holding);
3) Multicom N.V., ("Multicom"), incorporated under the laws of Belgium
on April 2, 1997 (owned 100% by UTG Belgium);
4) United Telecom GMBH, ("UTG GmbH"), incorporated under the laws of
Switzerland on May 28, 1996 (owned 100% by UTG Holding);
All significant intercompany accounts and transactions have been
eliminated in consolidation.
See also Management's Discussion and Analysis of Financial Condition
and Results of Operation for additional information regarding
organizational changes of the Company.
b) Line of Business
The Company is a switch-based provider of private voice, fax and
data management telecommunication services throughout Europe and
Canada.
c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
d) Organization Costs
Organization costs consist of legal and other administrative costs
<PAGE>
incurred relating to the formation of the Company. These costs have
been capitalized and will be amortized over a period of five years.
e) Goodwill
Goodwill represents the cost in excess of the fair market value of
the acquisitions of certain subsidiaries. Amortization is being
computed using the straight-line method over a period of forty
years.
f) Customer lists
Customer list presents the costs of the acquisition of subscriber
names at their fair market value. Amortisation is being computed using
the straight line method over a period of three years.
g) Property and equipment
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives
of the various classes of assets. Maintenance and repairs are
charged to expense as incurred.
h) Bank Overdraft
The Company maintains overdraft facilities at certain banks. Such
overdraft positions are included in current liabilities.
i) Translation of Foreign Currency
The Company translates the foreign currency financial statements of
its Swiss, Belgium and United Kingdom subsidiaries, in accordance
with the requirements of Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation". Assets and liabilities are
translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during
the period. Resulting translation adjustments are recorded as a
separate component in stockholders' equity. Foreign currency
transaction gains and losses are included in the statement of
operations.
j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
k) Loss Per Share
Loss per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the
period. Weighted average common shares outstanding were 1,343,190.
Average common equivalent shares outstanding have not been included,
as the computation would not be dilutive.
l) Income Taxes
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". The liability method
requires the recognition of deferred tax assets and liabilities for
<PAGE>
the expected future tax consequences of temporary differences
between the reported amount of assets and liabilities and their tax
basis.
m) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, approximates fair value due to
the relatively short maturity of these instruments.
n) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require companies
to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
o) Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", was issued (SFAS No. 121). SFAS No.121 requires that long-lived
assets and certain identifiable intangibles to be held and used or disposed of
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has adopted this statement and determined that no
impairment loss need be recognized for applicable assets of continuing
operations.
<PAGE>
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at June 30, 1998:
Telecommunications Equipment $ 3,691,705
Computer Equipment & Software
Furniture and Fixtures
Less: Accumulated Depreciation (1,284,120)
------------
$ 2,410,585
============
Depreciation expense for the three months ended June 30, 1998 was
$101,633.
NOTE 3 - MINORITY INTEREST
At June 30, 1998 there are no longer any minority interests in the
Company or any of its subsidiaries.
NOTE 4 - FOREIGN OPERATIONS
As described in Note 1b, substantially all of The Company's operations
take place throughout Europe and Canada and the majority of its
identifiable assets are located in Switzerland, Belgium and the United
Kingdom.
NOTE 5 - INCOME TAXES
The components of the provision for income taxes is as follows:
<TABLE>
<S> <C>
Current Tax Expense
U.S. Federal $ --
State and Local --
----------
Total Current --
----------
Deferred Tax Expense
U.S. Federal $ --
State and Local --
----------
Total Deferred --
----------
Total Tax Provision from Continuing
Operations $ --
==========
</TABLE>
<PAGE>
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<S> <C>
Federal Income Tax Rate ( 34.0)%
Deferred Tax Charge (Credit) --
Effect on Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit --
----------
Effective Income Tax Rate 0.0%
==========
</TABLE>
At June 30, 1998, the Company had net carryforward losses of
approximately $4,892,549. Because of the current uncertainty of realizing
the benefit of the tax carryforward, a valuation allowance equal to the tax
benefit for deferred taxes has been established. The full realization of
the tax benefit associated with the carryforward depends predominantly upon
the Company's ability to generate taxable income during the carryforward
period.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and liabilities
for financial reporting purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
at June 30, 1998 are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets
Loss Carryforwards $ 4,892,549
Less: Valuation Allowance (4,892,549)
-----------
Net Deferred Tax Assets $ --
===========
</TABLE>
Net operating loss carryforwards expire starting in 2007 through 2011.
Per year availability is subject to change of ownership limitations under
Internal Revenue Code Section 382.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
a) The Company's future minimum annual aggregate rental
payments required under operating and capital leases that have initial
or remaining non-cancelable lease terms in excess of one year
are as follows:
<TABLE>
<S> <C>
1999 51,238
2000 51,238
2001 51,238
2002 51,238
2003 and thereafter 51,238
---------
Total Minimum Lease Payments 256,190
=========
Less: Amounts Representing Interest 0
Present Value of Future Minimum
Lease Payments
Less: Current Maturities 0
---------
Total 256,190
</TABLE>
Rent expense under operating leases for the three months ended June 30,
<PAGE>
1998 was $18,760.
b) The Company is a party to claims and lawsuits arising in the
normal course of operations. Management is of the opinion that these claims
and lawsuits will not have a material effect on the financial position of
the Company. The Company believes these claims and lawsuits should not
exceed $50,000 and accordingly has established a reserve included in
accounts payable and accrued expenses.
NOTE 7 - STOCK OPTIONS
Effective June 30, 1998, the Company issued 80,000 shares of Common
Stock to an investor for a purchase price of $2.00 per share. For each share of
Common Stock purchased, the investor received three warrants, each to purchase
one share of Common Stock at $2.00, $3.00 and $4.50, respectively. The warrants
will expire five years from date of issuance.
NOTE 8 - SUBSEQUENT EVENTS
The Company is currently developing a credit card based phone service for
the Swiss market. When completed, the credit card holder can use the credit card
as a post-paid phonecard benefiting from discounts for international and
national long distance communication compared to the rates of Swisscom. The
Company expects to be able to launch this product and program in the near
future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the quarter ended June 30, 1998. This
information should be read in conjunction with the Company's consolidated
<PAGE>
financial statements appearing elsewhere herein. All references herein to the
Company shall, unless the context otherwise requires, be deemed to include UTG
Communications International, Inc. and its subsidiaries.
General
The Company commenced operations in April 1996 and is a holding company for a
number of operating subsidiaries organized at various times since February 1996.
The Company has received an aggregate of approximately $8,085,628 in equity
capital. Since inception, the Company's operations have been focused on
establishing and enhancing its switch-based European communications network and
expanding its European customer base.
The Company's revenue to date has been generated from long distance telecom
services provided to retail corporate customers and wholesale customers. The
Company's wholesale customers presently comprise international telecom carriers
and national telecoms, and the Company's retail customers presently comprise
small and medium-sized companies located in Switzerland, Belgium and the
United Kingdom. As previously reported, the Company has been granted an
International Simple Resale ("ISR") license from the United Kingdom Secretary of
State for Trade of Industry. The ISR license permits the Company to engage in
the international resale of telecom services. The Company has filed an
application to the United Kingdom Department of Trade and Industry for the
issuance of an International Facility License ("IFL"). The IFL permits the
Company to own international facilities such as circuits, thereby enabling the
Company to gain a cost advantage by eliminating leased line charges. The IFL
license application has been granted in this quarter.
While the Company's retail operations were initially limited to Switzerland, the
Company has begun to expand its operations through subsidiaries and joint
ventures into other European countries, including the purchase of Multicom NV
("Multicom"), a long distance reseller headquartered in Antwerp, Belgium, in
June 1997.
During the quarter ended June 30, 1998, for marketing purposes, UTG Telecom AG
("Telecom") was renamed Starfon Telecom Services AG ("Starfon").
Following the regulatory opening of the Swiss and European Telecommunications
markets on January 1, 1998, it is no longer necessary to route all outgoing
calls via London. Applicable telecommunications regulations now permit
interconnection with all European countries. This revision is expected to save
the Company a considerable amount of fixed overhead costs, and management
believes that this development is likely to facilitate economical selfsustaining
operations for the Company within a shorter period of time than originally
contemplated.
In Germany, the Company has undertaken the development of an international
calling card project for a large bank and insurance company. In its efforts to
focus on profitable markets the company is reviewing this project to determine
whether future investment or divestment is appropriate. The Company is currently
exploring several opportunities in its core markets and in Germany as well as in
other countries. The Company will carefully evaluate expansion of its operations
into other European countries as and when business, market and regulatory
conditions permit.
There can be no assurance that the Company's efforts in any of the foregoing
countries will result in successful commercial operations. The Company's goal is
to focus on its current operations and, under the new management, to streamline
costs and to target optimal network capacity utilization.
Financial Condition
At June 30, 1998, the Company had a working capital deficit of $12 and an
<PAGE>
accumulated deficit of $4'892'549, as compared to a positive working capital and
accumulated deficit of $223,444, and $4`551`2246, respectively, at March 31,
1998.
Effective June 30, 1998, the Company exercised a call option under a
subscription agreement, dated January 17, 1998 and sold to an accredited and
sophisticated investor 80,000 shares of common stock at a price of $ 2.00 and,
for no additional consideration, warrants to purchase an additional 80,000
shares of common stock at 3.00, 4.00, 4.50 per share. As of June 30, 1998, the
Company had received $160,000 for such shares and warrants.
The Company believes that its network has adequate switching capacity to serve
projected volume of traffic through calendar 1998. The Company initially
designed its network to take advantage of deregulation across Europe. It can
perform distributive least cost routing by using its hub sites in European
cities to direct traffic to carriers within a country, across the UTG network to
another country for termination, or back to the switch in London for routing.
The selected path is based on the least cost. This provides a large amount of
flexibility to the Company, and to ensure the quality of the connections and
lowest cost. With this distributive architecture the capacity of UTG's main
switch is not expected to be a limiting factor with regard to expansion. The
opening of the European telecommunications markets allows the Company to take
full advantage of its network flexibility.
Based upon the Company's plan of operation, the Company estimates that its
existing financing resources (including the available resources pursuant to the
call right under the above-mentioned subscription agreement) together with funds
generated from operations, will be sufficient to fund the Company's current
working capital requirements. However, there can be no assurance in that
regard.
Accounts payable and accrued expenses amounted to approximately $1,555,042 at
June 30, 1998 compared to $1,369,818 at March 31, 1998.
Results of operations
During the quarter ended June 30, 1998, the Company continued its revised
management program under which it has implemented a system of controls and
assessments to more closely monitor gross profits, expenses and costs. In
addition, the Company is applying principles of lean management. Pursuant to
these management changes, the Company expects to realize significant savings and
further expects that its operations can be profitable within a reasonable period
of time, however there can be no assurance in this regard.
Sales
During the quarter ended June 30, 1998, the Company recorded net sales of
$580,869, compared to $1,317,401 during the quarter ended June 30, 1997. The
decrease in sales resulted from a 2 1/2 month interruption in the Company`s
services to carriers during the quarter ended June 30, 1998 because of the
relocation and upgrading of the Company's switches in the United Kingdom. The
Company expects these switches to be fully operational in the next quarter. The
gross margin for the three months ended June 30, 1998 increased to $277,612 (or
47.8% of the Company sales ) as compared to the same period in 1997 which was
$335,887 (or 25.5 % of the Company sales). This increase in gross profit
reflects the fact that the Company's cost of sales have decreased.
The Company's revenue has been generated primarily from long distance telecom
services provided to retail corporate customers in Switzerland and Belgium and
wholesale customers. The Company's wholesale customers presently comprise
international telecom carriers and national telecom companies. Management
anticipates that the allocation between wholesale and retail customers will
<PAGE>
shift in favor of retail customers consistent with the Company's goal of
expanding its corporate retail customer base.
Cost of Sales
Cost of sales was $303,257 for the quarter ended June 30, 1998, as compared to
$981,514 for the equivalent period in 1997, of which approximately 50% being for
carrier charges and the balance being attributable to costs for leased lines and
related activities. Carrier charges and transport (leased lines) charges per
unit are ultimately dependent on the Company's ability to generate high volumes
of traffic. This decrease is the result of the Company's new management and
business strategy and the Company's ability to purchase services from carriers
at competitive rates. Cost of sales have also decreased because of the
relatively smaller proportion of fixed costs related to leased lines, which are
incurred regardless of the amount of traffic carried, compared to the carrier
costs, which vary depending on the amount of traffic carried.
Selling and Technical Expenses
Selling and technical expenses for the quarter ended June 30, 1998 were
$331,460, compared to $648,816 for the quarter ended June 30, 1997. The decrease
is the result of the Company's restructuring process in which a program of cost
cutting measures has been implemented to limit expenses.
General and Administrative Expenses
General and administrative expenses for the quarter ended June 30, 1998 were
$285,697, compared to $894,300 for the quarter ended June 30, 1997. These
expenses decreased because of the reduction of overhead costs, including
management and consulting fees, salaries, travel expenses and other operating
expenses.
Net Income/Loss
The Company realized net sales of $580,869 in the quarter ended June 30, 1998
and a net loss for the three months ended June 30, 1998 of $341,325 compared to
sales of $1,317,401 and a net loss of $1,198,608 during the quarter ended June
30, 1997. The relative decrease of the net loss is reflecting the more limited
nature of the Company's operations with less overhead, personnel expenses,
depreciation and other operating expenses. Significant contributing factors to
the Company's loss during the quarter ended June 30, 1998 were depreciation and
amortization expenses of $164,376 and consultancy fees for building up new
systems in an estimated amount of $150,000, as well as the strongly reduced
revenues from the wholesale business in the United Kingdom due to the relocation
and upgrading of the Company's switches there. Management anticipates
substantially higher revenue in the near future.
FORWARD-LOOKING STATEMENTS
Investment in the Company's securities involves a high degree of risk. In
evaluating an investment in the Company's securities, Company stockholders and
prospective investors should carefully consider the risk factors discussed in
the Company's Registration Statement on Form SB-2, Registration No. 333-8305 and
the information detailed in the Company's Form 10-KSB for the fiscal year ended
March 31, 1998 and this Form 10-QSB under Item 2 Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as
information contained in the Company's other filings with the Securities and
Exchange Commission.
Certain statements in this Report under Item 1 and Item 6 regarding the
Company's estimates, present view of future circumstances or events and
<PAGE>
statements containing words such as "estimates," "anticipates," "intends" and
"expects" or words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of
1995,including, without limitation, statements regarding the Company's ability
to meet future working capital requirements and future cash requirements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such forward-
looking statements. Forward-looking statements speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information future events or
otherwise. Risk factors include, among others, delays in expanding the Company's
network; need for additional financing; failure to receive or delays in
receiving regulatory approval; general economic and business conditions;
industry capacity; industry trends; demographic changes; competition; material
costs and availability; the loss of any significant customers; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations including changes in industry regulations; and other
factors referenced in this Report. For a more detailed description of these and
other factors, see the section entitled "Risk Factors" in the Company's
Registration Statement on Form SB-2, Registration No. 333-8305, which was
declared effective on September 6, 1996.
Part II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings
On or about April 24, 1997, litigation against UTG Holding AG and other
individual defendants was commenced in labor court in Paris, France by Mr. James
Taylor. On May 25, 1998, the court rendered a judgment against the Company in
the amount of 488,187 French Francs (approximately $64,670) for breach of an
alleged employment arrangement. The Company has filed an appeal against this
judgment.
On January 5, 1998, the Company's former Chief Operating Officer, Keith Rhea,
without authorization of the Company's Board of Directors, confessed a judgment
against the Company in favor of the Company's former part-time Chief Financial
Officer, Robert Finn, in the amount of $111,710. The alleged basis for this
amount is outstanding compensation and termination fees for various alleged
consulting arrangements between the Company, Mr. Finn and Telepath, Ltd, a
company which the Company believes to be affiliated with Mr. Rhea. The Company
believes that such judgment was fraudulently obtained, and that all or part of
such claims are without merit. The Company is presently evaluating
several strategies, including the commencement of legal proceedings against one
or more of the persons involved in this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective June 30, 1998, the Company exercised a call option under a
subscription agreement, dated January 16, 1998 and sold to an accredited and
sophisticated investor 80,000 shares of common stock at a price of $ 2.00 and,
for no additional consideration, warrants to purchase an additional 80,000
shares of common stock at 3.00, 4.00, 4.50 per share. As of June 30, 1998, the
Company had received an amount equal to $160,000 for such shares and warrants.
In connection with this issuance, Interfinance Investment Ltd., an affiliate of
the Company controlled by the Company's Chief Executive Officer acted as
<PAGE>
placement agent and is entitled to a placement fee of 3% of the gross proceeds
to the Company. As of the date hereof, Interfinance has not enforced its right
to this fee. Under the terms of the subscription agreement, as amended, the
Company has the right,subject to certain conditions, to request the subscriber
to purchase up to an additional 420,000 shares of Common Stock upon the same
terms and purchase price on or prior to September 30, 1998. These transactions
were exempt from the registration requirements of the Securities Act of 1933 by
reason of the exemption provided by Section 4(2) thereunder and on the basis of
certain representations provided by the subscriber including that it is an
"accredited investor."
Item 3 Defaults upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
Not Applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
Part II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on form 8-K were filed by the Company during the quarter ended
December 31, 1997.
-21-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTG COMMUNICATIONS INTERNATIONAL, INC.
Date: August 14, 1998 By: /s/ Ueli Ernst
---------------------------------------
Ueli Ernst, Chairman and CEO
(Principal Executive Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from UTG
COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 123,145
<SECURITIES> 0
<RECEIVABLES> 1,336,638
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,665,540
<PP&E> 2,410,585
<DEPRECIATION> 164,376
<TOTAL-ASSETS> 5,174,290
<CURRENT-LIABILITIES> 1,666,552
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 7,425,507
<TOTAL-LIABILITY-AND-EQUITY> 5,174,290
<SALES> 580,869
<TOTAL-REVENUES> 580,869
<CGS> 330,257
<TOTAL-COSTS> 920,275
<OTHER-EXPENSES> (139)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154
<INCOME-PRETAX> (341,325)
<INCOME-TAX> 0
<INCOME-CONTINUING> (341,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (341,325)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.16)
</TABLE>
